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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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November 7, 2022

Do Freeway Lids Spur Development in Cities? Evidence from Dallas

The Federal Highway Act of 1956 connected Americas cities like never before, but the system of roads also divided and isolated existing city neighborhoods. As a result, people lost neighbors and local businesses and found themselves cut off from other parts of the cityOff-site link. Moreover, exposure to air and noise pollution increased, and some residents simply left the city altogether.

The recently passed Inflation Reduction Act included $3 billion in neighborhood access and equity grantsOff-site link, expanding on $1 billion in funding for the Reconnecting Communities PilotOff-site link grants (part of the 2021 infrastructure bill Adobe PDF file formatOff-site link). These funds are intended to remediate some of the ill effects of urban freeways, and the grants could fund freeway removal or other mitigation strategies. The most ambitious projects, however, are likely to put "lids" composed of parks and surface streets over sections of existing freeways. Atlanta currently has three proposed lidding projects that are likely to compete for this funding: a park over Highway 400Off-site link in Buckhead, a park over the connectorOff-site link (I-75/I-85) in Midtown between North Avenue and 10th Street, and a separate proposalOff-site link over the connector between downtown and Midtown around Peachtree Street.

Capping a freeway with a park and surface streets could play a significant part in ameliorating the unpleasantness of an urban freeway. However, these lidding projects are expensive to construct and maintain and don't completely eliminate air and noise pollution from freeways. Whether such projects are fiscally sustainable largely depends on their ability to attract new investment and residents to the city.

One of the more celebrated recent lidding projects is Klyde Warren ParkOff-site link, a five-acre park spanning three city blocks of freeway in downtown Dallas. The park was partly funded with an assessment on proximate land and, at least anecdotally, attracted considerable investmentOff-site link to that area of Dallas. Like Atlanta, Dallas is a growing, low-density, largely auto-dependent Sunbelt city. If a freeway lid could attract new investment and residents to the city core, then such projects might have broader impact.

One challenge to evaluating any place-based project or subsidy is identifying the appropriate treatment area. Although a new park might attract investment or raise property values for immediately adjacent land, do such parks benefit the city as a whole? Or do they just redirect normal, market-driven development to a different location?

To look at whether the construction around Klyde Warren Park represented development beyond what might otherwise have happened, I looked at SupplyTrackOff-site link data on new construction for six years before and after construction on the park began, both in Dallas and in a control group of six cities. I selected large southern cities not directly on the coast: Fort Worth, San Antonio, Austin, Houston, Nashville, and Atlanta. Looking before and after completion of the Dallas freeway lid and across cities, we can ask if the pace of new construction in Dallas increased relative to the control group. This is, effectively, a simple difference-in-difference estimate of the treatment effect of the freeway lid on Dallas. The table below summarizes the evidence on new construction.

Relative to its peers, Dallas experienced faster office and multifamily construction growth after lid construction began in 2012. Dallas added 1.3 million square feet of office space, a rate that is 50 percent faster than what occurred in the six prior years. Multifamily housing (apartments and condominiums in buildings with 5 or more units) grew even faster. Dallas added nearly 5,300 individual multifamily units after starting the lid, more than twice as many units as the six years before. I should note, though, that this period spans the housing market collapse of 2008. However, most large southern cities were doing well after 2012 as their economies slowly recovered from the Great Recession and developers took advantage of low interest rates. Still, compared to the control group cities, Dallas appeared to outperform. If we subtract the percentage growth in office and multifamily space from that of other large southern cities—either just in Texas or pooling all seven cities together—the growth in Dallas still looks exceptional. Compared to other Texas cities, Dallas office space grew 18 percent faster and multifamily grew 42 percent faster. In percentage growth terms Dallas's performance looks even better when we include Atlanta and Nashville in the control group, suggesting that whatever immediate growth that happened around the park did not simply divert growth from elsewhere in the city.

I also looked at the annual growth relative to 2012 for each city's hotels and retail space. Hotel room growth was weaker in Dallas than in peer cities, suggesting that new hotels built near the park might have come at the expense of other locations in the city and did not represent a net addition to supply. Perhaps parks are simply a more attractive amenity to residents than tourists, or maybe—given the relatively brief exposure—tourists were more indifferent to freeway noise and pollution ex ante. Retail growth never recovered after the Great Recession, but it didn't look particularly worse in Dallas than for the control group of cities.

Of course, none of this evidence is definitive. Cities are complex, and numerous idiosyncratic factors affect a cities labor demand, attractiveness to workers or their capacity to supply new houses and offices. Still, when looking at investment activity, Dallas's growth in multifamily and housing and office construction is at least consistent with the idea that building the Klyde Warren Park lid over the freeway in downtown Dallas made the city a more attractive place to live and work.

October 11, 2022

Will Office Conversions Meet Housing Demand?

Recent inflation reports Adobe PDF file formatOff-site link have been disappointing, with core year-over-year inflation remaining well above the Federal Open Market Committee's long-run target. A major driver of the increase in recent months has been the rising price of shelterOff-site link (effectively the rental cost of housing), which has continued to accelerate. At the same time, data Adobe PDF file formatOff-site link highlighted by Jose Barrero, Nicholas Bloom, and Steven Davis, show that 31 percent of workdays are now spent remote, suggesting that much of the work-from-home patterns that developed during COVID may persist. In this context, it is interesting to ask whether underutilized office space could be repurposed as housing, thereby increasing the supply of housing units and slowing rent inflation. Certainly, many anecdotes in the press (such as hereOff-site link and hereOff-site link) discuss this possibility.

After a stunning surge in housing prices and rents, US cities are straining to produce enough units to meet the demand for new housing space. Meanwhile, economists have determinedOff-site link that the residential market needs significantly more density (read: verticality)—especially in the largest cities, where the tallest office buildings are located. However, building new multifamily housing is difficult. Zoning, building codes, height limits, parking requirements, and other regulations restrict the unit count of new multifamily housing and increase the cost of new construction, if they allow it at all. Incumbent residents often oppose new construction and block projects of sufficient scale. The barriers to new multifamily construction include factors such as:

  • Economic constraints: Redevelopment is often more expensive than the status quo because it requires demolition or land assembly or both to combine parcels, which several experts have shown to add significant costs (see hereOff-site link and hereOff-site link).
  • Legal and social constraints: Building height limitsOff-site link, neighborhood opposition, zoning, and other regulations and veto points can all stand in the way of changing the use and density of a property in a large metropolitan area.
  • Structural constraints: New construction technology, compliance with new building codes, and new financing may all raise the cost of replacement above the marginal benefit of the new use of space.

Could existing office buildings, already built and now underutilized, be converted to housing?

If owners of office buildings are undertaking conversions, their plans for change should show up in the SupplyTrack databaseOff-site link, a joint product of CBRE and Dodge Data and Analytics that tracks as many commercial development projects as possible across the United States (see figure 1). Unlike the US Census Bureau's building permits database, SupplyTrack doesn't just tally new development. It also reveals redevelopment, like office-to-housing conversions.

SupplyTrack attempts to identify projects well before the permitting stage. On average, we can observe a multifamily project 16 months before it breaks ground and potentially well before the publicly available permit dataOff-site link. (I should note that some projects discovered by SupplyTrack never break ground. In this blog post, I impose an ad hoc cutoff of eight years and drop projects that were not started within eight years. Different cutoff dates do not materially affect the figures below.) An announced or discovered development project is one of the earliest indicators of the future of the construction cycle. Conversions to multifamily are typically identified even earlier—on average, 18 months before they start. One explanation for this is that conversion projects, unlike a vacant lot, are still producing a stream of revenue, so threshold return required to move forward might actually be higher.

Chart 1 of 2: Multifamily Housing Converted from an Existing Use

Don't see a spike in planned conversions of office buildings after the COVID-19 pandemic hit? Neither do we.

From 2007 to 2019, SupplyTrack found that an average of 2,300 multifamily units were created monthly out of formerly office, warehouse, or industrial use. Historically, adaptation of existing structures is about 10 percent of newly supplied multifamily housing (in buildings with five or more units) or 3 percent of all housing units. Thus, conversions would need to ramp up massively to have an appreciable effect on rents. However, average conversions declined to just 2,053 a month from April 2000 through June 2020 and don't appear to be trending up. Importantly, these numbers aren't affected by any lengthening of construction time due to supply chain shortages because they represent starts rather than completions, and conversions to multifamily housing don't appear to be trending up.

Of course, not all buildings are equally threatened by the work-from-home revolution. Perhaps larger office buildings in abandoned central business districts are better suited to conversion than the often-smaller office complexes distributed around the suburbs. To compare these categories on an equal footing, we indexed the annual conversion activity to 100 in 2007, indicating the relative percent change each year (see figure 2). Again, we see little evidence of a pandemic surge in conversions.

Chart 2 of 2: Multifamily Unit Conversions since January 2007

Large office buildings, which can be converted into 50 or more units, might seem especially attractive candidates for conversion—consider office towers in empty central business districts—but this category isn't unusually active. If anything, both large and small conversion projects appear to be declining.

Perhaps developers are confronting a daunting, even existential, question: is the office building really dead? Despite all the benefits of the work-from-home (WFH) model, economists have documented many ways that workers are more productive in person (see hereOff-site link, here Adobe PDF file formatOff-site link, and hereOff-site link). Certainly, pausing can be an optimal response when uncertainty is high. One problem is likely, that most of the WFH hours are coming from hybrid work, not pure WFH. Hybrid work may raise productivity or increase the surplus to employees, but it may not actually free up much conventional office space. Whether firms will continue to lease space that is only used three days a week remains to be seen, but at the moment, the hybrid model appears to be keeping widespread conversion of offices to rental on hold. In any case, it seems unlikely that office conversions will blunt rental increases anytime soon.




September 23, 2022

How Has the Market Responded to Restoring Price Stability?

Note: The author thanks Mark Jensen and Larry Wall for their help with this post.

The Federal Open Market Committee (FOMC) implements monetary policy chiefly through changes in its federal funds rate target, and market participants form expectations about the evolution of future monetary policy decisions based on data they think are relevant to policymakers. Between the June and July FOMC meetings, incoming data started to suggest some parts of the economy might already be feeling the effects of tighter monetary policy. On the other hand, data since July tell a different story, one that suggests the FOMC still has a way to go in its efforts to fight inflation and restore price stability. So how have market participants interpreted these disparate pieces of data, and what could they mean for future monetary policy decisions?

In this post, I use the Atlanta Fed's Market Probability Tracker to understand how data since the June and July FOMC meetings have affected the market's expectations about the path of future monetary policy, similar to the analysis I did with Atlanta Fed economist Mark Jensen in a Macroblog post late last year. As another Atlanta Fed colleague, Mark Fisher, and I discussed in a Notes from the Vault article, the Market Probability Tracker generates estimates of the expected federal funds rate path based on eurodollar futures and options on eurodollar futures. Eurodollar futures and options deliver a three-month LIBOR (the London interbank offered rate) interest rate average, which is closely linked to the federal funds rate. Additionally, eurodollar futures and options are among the most liquid of financial instruments, with contracts that are expiring several years in the future regularly traded. As a result, the Market Probability Tracker generates our best estimates of expected rate paths by incorporating all the available data that the market believes will affect future policy decisions.

Figure 1 below uses the expected rate paths produced by the Market Probability Tracker to illustrate how market expectations between the June and July FOMC meetings responded to new information about the economy. The solid black line in figure 1 below shows the federal funds rate path expected by market participants after the FOMC's meeting press conference on June 15 video fileOff-site link. The black dotted and dashed lines represent, respectively, expectations after Fed chair Jerome Powell's Senate Banking Committee testimony on June 22Off-site link and after the release of the US Department of Labor's weekly report of unemployment insurance initial claims Adobe PDF file formatOff-site link on June 30. Although economic updates occurred throughout the intermeeting period (the New York Fed maintains a list of important releases going back to 2018 in its Economic Indicators Calendar), the changes in expectations on these two dates best summarize the overall change in the market's expectations. Lastly, the solid orange line represents expectations following the FOMC's press conferenceOff-site link on July 27. I also include (shaded in gray) the target range of 225 to 250 basis points announced at that meeting.

Starting with the black dashed line, after the June FOMC meeting, market participants expected the federal funds rate target range to reach 375 to 400 basis points by the first quarter of 2023 and then fall 75 basis points over the course of the next two years. During his June 22 Senate Banking Committee testimony, Chair Powell said that an economic downturn triggered by rate hikes to tame inflation was "certainly a possibility," although he added that such a downturn was neither the Fed's intent nor, in his view, necessary. His statement was important, albeit qualitative, information for the market because the FOMC in the past has often responded to economic downturns by lowering interest rates, which market participants interpreted as lower overall federal funds rates in the future (represented by the dotted black line). Expectations fell even lower after the Department of Labor's June 30 report hinted at a moderating labor market, with initial claims near five-month highs (represented by the dashed black line). By the July FOMC meeting (represented by the orange line), market participants further expected rate hikes to end this year and then fall 100 basis points during the next two years, as subsequent initial unemployment claims reports remained elevated and the July 21 Philadelphia Fed's manufacturing survey showed a drop in activity.

Figure 2 shows the Market Probability Tracker's estimates of the federal funds rate path expected by market participants following the July FOMC meeting (the solid orange line). It also shows the expected rate path following the August 5 release of the July employment situation reportOff-site link from the US Bureau of Labor Statistics (represented by the dotted black line), the expected rate path following the September 8 release of the initial unemployment claims report (represented by the dashed black line), and the expected rate path following the September 13 release of the August consumer price indexOff-site link (represented by the dot-dash line). Much like figure 1, these dates best summarize how market participants reacted to the evolving data since the July FOMC meeting (despite many other data releases occurring throughout the intermeeting period). Lastly, the solid black line represents the expected rate path on September 20, the day before the press conference following the FOMC meeting.

In the eight weeks since the July FOMC meeting, the data that the Committee said it would use to evaluate future policy moves came in much stronger than expected. Rather than moderating, labor markets appeared to tighten, with the Bureau of Labor Statistics reporting a 526,000 increase in nonfarm payrolls in its July jobs report and the Department of Labor reporting a decline in initial unemployment claims throughout August that culminated, in the September 8 report, in their lowest reported levels since May. The consumer price index for August, which many had expected to fall on a month-over-month basisOff-site link, showed inflation increasing 0.1 percent from July. The less-volatile core measure of inflation that excludes gasoline and food prices also rose 0.6 percent from July, twice the expected rate. Given the data's direction leading up to the September FOMC meeting, market participants expected a more aggressive pace of rate hikes through the end of the year, from 325 basis points after the July FOMC meeting to nearly 450 basis points. They also expect rates to remain much higher for much longer, with rates at the end of 2025 near 350 basis points—which would be at least 100 basis points higher than the 225 to 250 basis points that the chair described as the "neutral" policy rate at his July press conference.

Figure 3 shows the Market Probability Tracker's estimates of the federal funds rate paths that market participants expected the day before the press conference following September's meeting (the solid black line), and after the press conference on September 21 Adobe PDF file formatOff-site link (the solid orange line). Chair Powell, in his opening remarks, commented that tight labor markets "continue to be out of balance" with demand and that "price pressures remain evident across a broad range of goods and services." The information contained in both the press conference and the material released by the Committee did not significantly change market expectations about the future path of monetary policy, which already incorporated recent data on inflation and labor market conditions.

Turning back to the question posed by this post's title, the rate path movements seen in reaction to the incoming data show that, initially, market participants expected rate hikes to end in 2022. But the data, which came in much stronger after the July FOMC meeting, led the market to expect the Fed to raise rates higher than had been expected following the June FOMC meeting. Market participants also expect the Fed to keep those rates much higher for longer in order to cool demand—as Chair Powell put it in his August 26 speechOff-site link at the Jackson Hole economic policy symposium, "until we are confident the job is done."

More importantly, the movements in the rate paths highlight the insights we can gain from the Market Probability Tracker into how information about the economy affects the market's expectations of future monetary policy decisions. Chair Powell observed during the June press conference that "monetary policy is more effective when market participants understand how policy will evolve." With the rate paths produced by the Market Probability Tracker each day, we can begin to make that assessment.

August 31, 2022

Lessons from the Past: Can the 1970s Help Inform the Future Path of Monetary Policy?

People in monetary policy circles sometimes use the phrase "long and variable lags" to describe the delayed impact of the Fed's main policy tool on demand and inflation. The popularization of that phrase can be traced to a speech by Milton Friedman during the 1971 American Economic Association meetings, and since then people usually use it to describe the impact of Fed policy on economic output and inflation. Yet, during that speech, when summing up his work on the subject, he noted that "...monetary changes take much longer to affect prices than to affect output," adding that the maximum impact on prices is not apparent for about one and a half to two years.

Since Milton Friedman, many economists have studied these "long and variable lags" (including former Fed chair Ben Bernanke). And, while the length of the lag has proven "variable" as first suggested, the main result still rings true. Changes in the stance of monetary policy have the largest impact on output first and then, much later, on inflation. A large literature bears out this assertion. Bernanke et al. (1999) and Christiano, Eichenbaum, and Evans (2005) point to a two-year lag between monetary policy actions and their main effect on inflation. Gerlach and Svensson (2001) report an approximately 18-month lag in the euro area, while Batini and Nelson (2001) estimate that changes in the money supply have their peak impact on inflation in the UK after a year.

That context is especially useful for monetary policymakers to keep in mind as they navigate the economic challenges of the pandemic. In a span of just two and a half years, the US economy has suffered its sharpest post-WWII decline in economic output, a subsequent rapid resurgence in demand, a dramatic disconnect between labor supply and labor demand, widespread supply and shipping constraints, and an inflation rate that has surged from roughly 1.5 percent to 9 percent in the past 17 months. And, despite current strong job growth and the highest inflation this country has seen in 40 years, worries over a potential recession mount (as evidenced by the number of questions Chair Powell was asked about the "r word" in his press conference Adobe PDF file formatOff-site link following the most recent meeting of the Federal Open Market Committee). These beliefs partly reflect the rapid shift in the fiscal and monetary policy stance over the past year. In response to the pandemic, Congress approved a stimulus package of $5 trillionOff-site link, while the Fed expanded its balance sheet by roughly the same amount. But now, the federal deficit has fallen more than 81 percentOff-site link in first 10 months of 2022 fiscal year compared to 2021. In turn, the Fed has embarked on policy normalization, raising interest rates well into the range of neutral and drawing down its balance sheet (actions known as quantitative tightening).

Although "this time is different," we might be able to gain insights into the appropriate path of monetary policy by revisiting the past. At the time of Milton Friedman's 1971 speech, the economy was coming out of what many economists saw as a policy-driven recessionOff-site link , which followed a period of fiscal tightening to make up for large government outlays for the Vietnam War and a sizeable slowing in money growth as the Fed attempted to quell rising inflation. Today, the main policy tool is the federal funds rate, but prior to the early 1980s, changes in the money supply were the primary instrument. (Monetary aggregates—that is, growth in the money supply—formally replaced bank credit as the primary intermediate target of monetary policy in 1970. At the time, the fed funds rate played only a secondary role and was used as guideline in day-to-day open market operations, aimed at smoothing short run volatility.) In the run-up to the 1969–70 recession, the Fed tightened policy, slowing the growth in the money supply from 8 percent on a year-over-year basis to just 2 percent (the associated increase in the fed funds rate was roughly 4.5 percentage points, to 9 percent). Yet, as quickly as the Federal Open Market Committee tightened policy in the late 1960s, it more than reversed course in response to a sizeable increase in the unemployment rate during the recession. By late 1971, the money supply was surging again, up 13 percent on a year-over-year basis.

The Fed's quick and stark policy reversal became a recurring theme in the 1970s. During the decade, the Fed quickly pivoted between battling high unemployment and high inflation, what many economists refer to as "stop-and-go" policiesOff-site link. Charts 1 and 2 clearly show these shifting stances as they occurred again in the run-up to and aftermath of the 1974–75 recession. Chart 1 plots the year-over-year growth rate in the money supply (M2) and the unemployment rate, and chart 2 plots the growth in the money supply against the year-over-year growth rate in consumer price index inflation.

These charts depict three points that remain salient today. First, the "stop-and-go" policies of the 1970s clearly highlight the "long and variable lags" that changes in monetary policy have on inflation. Money growth plateaus at high levels three times during the late 1960s through the 1970s: in 1968, 1972, and in the mid-1970s. Each of those periods is followed by a subsequent surge in inflation, prompting a sustained tightening of monetary conditions. But as soon as inflation began falling, the Fed quickly reversed course with a bold expansion in the money supply that overshadowed the one originating the previous cycle, citing spikes in unemployment along with a lagged decline in inflation as justifications for these reversals.

If we smooth through some of the cyclical dynamics, there was a sustained upward drift in both the unemployment rate and inflation. In the mid-1960s, both inflation and the unemployment rate were around 2 percent. And 1980 inflation was over 10 percent and the unemployment rate had drifted up to 6 percent.

This period's upward drift in unemployment and inflation ran counter to the era's prevailing wisdom, which held that higher inflation was simply the sacrifice needed to lower the unemployment rate, and vice versa, An insightful essayOff-site link by former Atlanta Fed economist Mike Bryan covers this period in depth. He writes, "The stable trade-off between inflation and unemployment proved unstable. The ability of policymakers to control any ‘real' variable was ephemeral. This truth included the rate of unemployment, which oscillated around its ‘natural' rate. The trade-off that policymakers hoped to exploit did not exist."

Why didn't this stable tradeoff exist? Part of the answer is that the unemployment rate fluctuates around an unobserved natural rate. (Fed chair Jerome Powell's 2018 speechOff-site link offers an accessible discussion of these unobservables.) But the other part of the answer that is particularly salient at the moment is that by the mid- to late 1970s, after enduring a sustained period of rising unemployment and inflation, people began to expect higher inflation rates.

Chart 3 plots one-year-ahead inflation expectations alongside inflation and money growth using data from the Livingston SurveyOff-site link, a twice-annual survey of a small group of professional economists that the Philadelphia Fed has conducted since the end of WWII. And here the upward drift in inflation expectations is striking. By 1980, inflation expectations had risen 10 percent. Our interpretation of these data is that the rapid reversals of policy that characterized Fed actions during the 1970s never allowed inflation to fall back to the 1 to 3 percent range that was the norm after the end of the Korean War. As a consequence, the expectation that inflation would not recede into the background eventually became embedded into the psyche of Americans. People who lived through this experience simply anticipated higher future inflation rates, with that expectation embedded into their price-setting and wage-bargaining decisions.

Now, history here is messy. A number of caveats and confounding factors contributed to the unfavorable economic outcomes of the 1970s. Fed historians such as Allan Meltzer argue that the prevailing Fed chair at the time, Arthur Burns, did not consider monetary policy as ultimately responsible for such high inflation. Instead, the chair pointed to unions' wage-bargaining power first and, in particular, "cost-push" shocks (that is, energy and food shortages) later as the responsible party. (And indeed, this "cost-push" theory of inflation, so prevalent at the time, merits further exploration since assuming that spikes in energy prices might have contributed to the unanchoring of inflation expectations makes sense.)

Yet, in the case of oil price shocks, there is a counterpoint. The breakdown of the Bretton Woods accords ultimately drove the sustained increase in oil prices, and their breakdown can be seen in the era's robust money growth at the time. The breakdown of these accords created a run on the dollar amid fears of inflation. The price of gold took off as many investors were scrambling for an inflation hedge. Interestingly, the increase in the price of oil actually followed the spike in the price of gold and other commodities.

The historical evidence suggests that by 1970, the attempt to defend the dollar at a fixed peg of $35 per ounce, established by the Bretton Woods agreements, had become increasingly untenable, and gold outflows from the United States accelerated amid sustained inflation and trade/fiscal deficits. The run on the dollar forced President Nixon to effectively "close the gold window," making the dollar inconvertible to gold in August 1971. One month later, OPEC communicatedOff-site link its intention to price oil in terms of a fixed amount of gold. Hence, the increase in the money supply, spurred by the run-up in gold prices, exacerbated the increase in the dollar price of oil and led to the high inflation that followed. OPEC was slow to readjust prices to reflect this depreciation. However, the substantial price increases of 1973–74 and 1979 largely returned oil prices to the corresponding gold parity (see chart 4), which, again, was then seen as an inflation hedge.

In this context, it's worth noting that the OPEC oil embargo following the Yom Kippur WarOff-site link lasted just a few months, but the price increase was permanent. Similarly, the drop in oil production following the Iranian Revolution was negligible, as Saudi Arabia increased production to offset most of the decline. Contrast these episodes to the Gulf War in 1990. Oil prices doubled during the conflict (July–October) but went back to previous levels once the war ended.

In sum, Arthur Burns leaned heavily into the notion that these cost-push shocks—and not Fed action—were ultimately responsible for inflation, effectively ignored the "long and variable" lags of monetary policy, misread the monetary dynamics, and reacted expediently to the real-side damage that high energy prices wreaked on the economy.

So let's fast-forward to today. The fiscal response to the onset of the pandemic was quite forceful—$5 trillion by most countsOff-site link—and at least on par with significant wartime spending. As these transfers and disbursements hit households' wallets and businesses' ledgers, money growth surged higher than 25 percent—peaking well above, though not as sustained as, the high money-growth periods during the 1970s (see chart 5). And we've seen a sharp surge in inflation that has gone well beyond pandemic-related supply constraints and shipping bottlenecks that affected certain production inputs such as computer chips. As of July 2022, roughly three-quarters of consumers' market basket rose at rates in excess of 3 percent (and two-thirds of the market basket increased at rates north of 5 percent). These levels are on par with those we saw during the Great Inflation of the 1970s.

The Committee has begun an aggressive campaign to squelch this inflation threat, hiking rates in each of the last four meetings by a cumulative 2 percentage points along with implementing plans to reduce the size of the Federal Reserve's balance sheet. It has also indicated that more policy tightening is to comeOff-site link. If history is any guide, at least in broad strokes, it will take some time before recent policy actions begin to affect inflation.

And here, it appears that the FOMC is very attuned to the lessons from the Great Inflation period. In a recent speech at Jackson HoleOff-site link, Chair Powell noted, "Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century." Perhaps more importantly, he emphasized, "Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy."